RESEARCH NEWS

Mendoza College researchers win award for study of accounting practices and the financial crisis

Three accountancy professors at the University of Notre
Dame’s Mendoza College of Business recently won a major research award for
their study examining the role of fair-value accounting during the recent
financial crisis.

The Best Paper Award is intended to enhance interaction
among academics and practicing members and to provide an incentive for
researchers to focus their efforts on topics relevant to the practicing
profession and standard-setters.

Fair-value accounting, also known as mark-to-market
accounting, has been an evolving part of Generally Accepted Accounting
Practices in the United States for more than half a century. It requires banks
to report assets at current market value versus the historical value, or
original purchase price. As the U.S. struggled to come out of the economic
recession, many critics—most notably, the banking industry—blamed fair-value
accounting for exacerbating the impact by forcing them to tighten loan
requirements. Congress subsequently held hearings on the subject and pressured
the Financial Accounting Standards Board, which responded swiftly with changes.

Among their conclusions, however, the Notre Dame researchers
contended the effect of fair-value accounting was negligible, and that banks
simply had a lot of charge-offs for bad loans. (Read more about the study in
the Notre Dame Business magazine story, “Is Fair
Value Really Fair?”)

“Our findings suggest that Congress was rash in demanding
rule changes,” said Easton. “This should give pause to advocates of even more
government involvement in accounting standard setting.”

The award committee, while noting that the Best Paper Award
is not intended as an endorsement of a particular research conclusion, provided
the following comment regarding the study: “The award committee commends the
authors on addressing one of the most pressing and important research questions
for accounting scholarship and standard setting in recent years. Research on
fair value accounting is ongoing and this paper will play an important role in
the debate.”